U.s. Has Become Debt Set

Consumers, Companies Living On Borrowed Dime

Here is one New Year's resolution neither corporate America nor Main Street has made good on: Reduce your debt.

U.S. corporations and individuals are on a borrowing binge of historic proportions, making them more vulnerable than ever to a slowdown in the economy.

Taking advantage of relatively low interest rates and steady demand from bond investors, corporations are borrowing money and selling bonds like never before, according to recently released data from the Federal Reserve. A record $4.2 trillion in outstanding debt has been accumulated by U.S. nonfinancial corporations through the third quarter. That is up 12 percent from the same period in the previous year, a pace that dwarfs the 5 percent or so rate of debt accumulation in the early 1990s. The debt load is up a staggering 60 percent in the past five years alone.

Meanwhile, household borrowing rose at a 9 percent annual clip in the third quarter and now stands at a record $6.3 trillion - almost a 50 percent jump in the past five years.

``It's a worrisome development'' that could lead to difficulties for companies and consumers if the economy slows, says John Lonski, senior economist at Moody's Investors Service.

What matters most isn't so much the level of debt, of course, but the ability of companies and consumers to pay it back. And with stock prices up, real estate raging, wages rising and corporate profits strong, all parties should handle their debt payments with ease, as long as the economy stays strong.

Household debt-service payments amount to 13 percent of disposable income in the United States, even with the recent rise in debt, a level that hasn't changed much in recent years. Meanwhile, profits of U.S. companies amount to four times their net interest expenses, up from two times in the early '90s, thanks to brisk earnings growth and declining interest rates.

In fact, rates remain near historical lows, so it makes sense for companies and households alike to ramp up their borrowing, especially with the economy growing at an eye-popping pace, many economists say. Indeed, many companies have been borrowing money in recent years to buy back stock, a wise move in the raging bull market. Other companies have taken on debt to invest in their businesses. These companies have generally been rewarded for boosting their borrowing, while those that have sat on their hands have often been left behind.